Economy

LONDON (Reuters) – The Bank of England intervened in the UK government bond market to rein in gilt yields, which rocketed after Britain unveiled a welter of tax cuts to be funded by borrowing on markets.It shone a light on a little-known corner of Britain’s pensions sector – liability-driven investment or LDI. WHAT IS LDI?A moneyspinner for asset managers.Defined benefit pensions have to make sure that their assets, such as stocks and bonds, can generate enough cash to meet liabilities – the monthly payouts guaranteed to pensioners.LDI is a popular product sold by asset managers like BlackRock (NYSE:BLK), Legal & General and Schroders (LON:SDR) to pension funds, using derivatives to help them “match” assets and liabilities so there is no risk of shortfall in money to pay pensioners.LDI was worth about 400 billion pounds ($453 billion) in 2011, quadrupling to 1.6 trillion pounds by 2021, according to the Investment Association.HOW DOES IT WORK?Pension funds have to post cash as collateral against their LDI derivatives in case they turn sour.The amount of cash needed rises and falls in tandem with values of the underlying assets tracked by the derivatives, which are a type of ‘insurance’ contract for guarding against unexpected moves in markets.WHAT WENT WRONG WITH LDI?Rocketing rates.Interest rates have been on the way up for months as central banks hiked borrowing costs in a well-flagged manner, giving pension funds time to adjust and find collateral over several days.But when UK bond yields rocketed in just days, it triggered emergency collateral calls for pension funds to cover their LDI-related derivatives in a matter of hours as rising yields mean the value of bonds falls.Pension funds struggled to find the cash in such a short time, forcing some to sell gilts, thereby putting further downward pressure on the bond market.To avoid instability in markets, the Bank of England stepped in to buy gilts worth 65 billion pounds, sending yields lower and taking pressure off the pension funds.PROBLEM SOLVED?For now.Even after Bank of England intervention, the yield on the benchmark 30-year government bond finished September 75 basis points higher than its closing level in August, the biggest monthly rise since 1994.The BoE is due to turn off the taps on Oct. 14, meaning pension funds have some breathing space to rejig their LDI strategies and build up their cushion of cash for any further collateral calls.WHY DOES IT MATTER?Pension funds are a cornerstone of the economy, helping scoop up huge amounts of stocks and bonds issued by companies that need cash to operate and grow.LDI has worked in times of steady markets and rates, but has been found wanting when markets move suddenly, potentially freezing pension funds.While such a rise in UK gilt yields was a rare event, regulators like the Bank of England will take a closer look to see if changes are needed to LDI.($1 = 0.8823 pounds) More

Colombia’s central bank board raised its benchmark interest rate by 100 basis points to 10% last Thursday, as inflation pressures and domestic consumption remain robust and central banks around the world boost rates.The country’s 12-month inflation hit 10.84% in August and the market expects the figure to have risen to 11.25% in September.As the bank tries to push inflation back towards the 3% target, these pressures could necessitate further interest rate rises this year, according to minutes from the meeting, published late on Monday. “(The board) pointed out that additional increases to the benchmark rate could be necessary in the coming months, depending on the information available at any given time on the internal and external economic situation, and its prospects,” the board said in the minutes. Six of the board’s seven members voted to hike the interest rate by 100 basis points last Thursday, with one board member voting to increase the rate by 50 basis points, which would have taken it to 9.5%.The lone policymaker warned that the biggest risk posed by aggressive monetary policy tightening was a “profound deceleration” in production and employment, adding that additional interest rates would more greatly impact economic growth over inflation. Inflationary pressures have not eased despite 825 basis points worth of hikes to the benchmark interest rate over the last year.”The trend of foreign interest rate increases entail similar adjustments in domestic interest rates, on which (the board member) observed that such high interest rates imply considerable risks on the consumer portfolio, the productive sector and government financing,” the minutes said.Analysts surveyed predicted that policymakers will take the rate to 11% before the end of the year. More

Monte dei Paschi (MPS) aims to launch a new share issue later this month for up to 2.5 billion euros ($2.5 billion) to fund the staff exits and lower its cost base from next year.The unions said in a note that 4,015 requests related to an early retirement option which will see staff receive 80% of their salary for up to seven years before they reach the pension age. [nL8N2ZG3GZ]MPS will take a few days to examine the requests following a meeting with unions on Tuesday, the note said.Stormy markets pose a challenge to MPS’ latest capital raising – its seventh in 14 years – with the banks managing the sale wary of the risk of unsold shares. ($1 = 1.0111 euros) More

(Reuters) -Wall Street futures rose more than 1% on Tuesday as easing U.S. Treasury yields boosted megacap growth and technology stocks, while investors awaited more economic data to gauge the Federal Reserve’s rate hike path.Data on job openings and factory orders will be in focus after the market opens, a day after weaker-than-expected manufacturing activity showed rising rates taming demand for goods. Yields on government bonds fell on hopes that the Federal Reserve tap down its aggressive stance, but Bank of New York President John Williams said despite nascent signs of cooling inflation, price pressures remain too high, implying the U.S. central bank must press forward.”The biggest story here is that last week you saw the Bank of England blink and investors around the world are starting to realize that there are limits to central banks’ hawkishness before things start to break,” said Thomas Hayes, chairman and managing member of New York-based Great Hill Capital.”The market loves to see that (weakness in yields and dollar) and it sets up well going into earnings season with expectations so low at 3.2% earnings growth.”The yields on the 10-year U.S. Treasury extended their decline, lifting rate-sensitive growth and technology stocks in trading before the bell.Megacap stocks such as Apple Inc (NASDAQ:AAPL), Microsoft Corp (NASDAQ:MSFT), Alphabet (NASDAQ:GOOGL) Inc and Nvidia (NASDAQ:NVDA) Corp rose around 1.6% to 2.6%.At 8:32 a.m. ET, Dow e-minis were up 389 points, or 1.32%, S&P 500 e-minis were up 58.5 points, or 1.59%, and Nasdaq 100 e-minis were up 213 points, or 1.89%.Banks such as Wells Fargo (NYSE:WFC) & Co, JPMorgan Chase & Co (NYSE:JPM) and Bank of America Corp (NYSE:BAC) added nearly 2% each.The rebound in stocks on the first trading day of the final quarter follows the S&P 500’s lowest close in nearly two years on Friday that capped its worst monthly performance since March 2020.Investors will continue to keep a close watch on comments from Fed speakers including New York President John Williams, Cleveland President Loretta Mester and Governor Philip Jefferson.Rivian Automotive Inc jumped 7.6% after the electric-vehicle maker said it produced 7,363 units in the third quarter, 67% higher than the preceding quarter, and maintained its full-year target of 25,000.Tesla (NASDAQ:TSLA) Inc bounced back 2.9% from its steepest selloff in four months in the previous session that was triggered by disappointing quarterly vehicle deliveries. More

OTTAWA (Reuters) – Canadian economists are scrambling for a reliable measure to track underlying inflation as large and frequent revisions have dented the credibility of a key Bank of Canada yardstick, even as the central bank said it was sticking with its core measures.Canada’s central bank has three preferred measures of core inflation – CPI-common, CPI-median and CPI-trim. CPI-common, once touted as the best gauge of the economy’s performance, has been subject to repeated revisions since the start of this year.Those same revisions show that price moves originally identified as transitory turned out not to be transitory at all, highlighting the measure’s ineffectiveness when prices rise rapidly and calling into question its value, said analysts.”I believe the steep upward revisions to common have rendered it useless as a policy guide,” said Doug Porter, chief economist at BMO Capital Markets. “It missed the inflation boat at the start of the year and sent an entirely misleading signal to policymakers.” To estimate core inflation, CPI-common measures all the components of the consumer price index that are moving together and separates out those that appear to be fluctuating due to sector-specific events. By contrast, both CPI-trim and CPI-median operate by filtering out extreme price movements.CPI-common was almost never revised when inflation was close to the Bank of Canada’s 2% target. But with prices rising faster than they have in decades, it is now being revised and revised again each month.These revisions are happening because the statistical model is picking up more co-movement in price, so the entire series has to be re-calculated each month, said Statistics Canada. “Essentially, this means that more CPI goods and services are moving in common, or that inflation is more broad-based now than it has been in the past,” the agency said in a statement.’LEAST VOLATILE’Despite the revisions, the Bank of Canada will “continue to look at all of our core inflation measures” as it works to get inflation back to target, said spokesman Alex Paterson.”One reason why the Bank uses three different core measures is to make sure we’re considering different price perspectives when judging the underlying trend of inflationary pressure,” he said in an email.Governor Tiff Macklem is due to give a speech on the current economic situation on Thursday, with a news conference to follow.The three core measures were introduced in 2017 to replace CPIX, which is the headline inflation figure excluding eight of the most volatile components in a basket of commonly used items.A 2019 report by Bank of Canada analysts, which evaluated the performance of seven core measures from 1992 to 2018, noted CPI-common was the “least volatile” and seemed “less prone to revisions and sector-specific shocks.”But it was developed at a time when inflation rarely drifted out of the Bank of Canada’s 1%-3% control range. Inflation has now been above 3% for 17 months and was at 7.0% in August.With CPI-common’s usefulness now in question, and the odds of a recession rising, the central bank should be taking a hard look at how it tracks core inflation, said analysts.”The Bank’s challenge is walking the extremely fine line between tightening enough to get inflation back to target while not tightening so much that it causes a major recession,” said Stephen Brown, senior Canada economist at Capital Economics.Some analysts say the Bank of Canada should return to CPIX or simply track how many index components are rising more quickly than the 2% target. Others say the best gauge is inflation excluding energy and food, because it is easy to explain and is similar to how the United States measures underlying price pressures.”The BoC needs to address how it has over-complicated core inflation and what measures it follows,” Derek Holt, head of capital markets economics at Scotiabank, said in a note. More

Villeroy, who is also governor of the French central bank, said that 4.8% in euro zone core inflation, which excludes energy and food prices beyond the central bank’s control, was too broad and too high.”We will raise interest rates as much as necessary to bring core inflation down,” Villeroy told Dutch newspaper NRC.”By the way, this will have a positive effect on banks’ net income; European banks are hence more solid than feared by some,” he added.European banks have come under pressure in financial markets in recent days over concerns about the health of Swiss group Credit Suisse.After the ECB raised its main interest rate by 50 basis points in July and 75 in September, Villeroy said it was important for the ECB’s next moves to remain “orderly”. This, he said, meant neither jolting markets nor tightening financial conditions for households and firms too abruptly.Villeroy said that the ECB should raise interest rates “without hesitation, by the end of the year” to the level at which they are neither stimulating nor putting a drag on the economy, which he estimated was somewhere “below or close to 2%”.After that, the ECB would embark on a second leg of its monetary policy normalisation cycle, which he said would be “more flexible and possibly slower”.”I don’t say that rate hikes will stop there, but we will have to comprehensively assess the inflation and economic outlook,” he added. More

BIRMINGHAM, England (Reuters) -Britain’s new Prime Minister Liz Truss triggered a fresh row in her party on Tuesday by suggesting that she could limit increases in benefit payments by less than soaring inflation as she seeks ways to fund her tax-cutting growth plan. Britain’s new leader has endured a tumultuous time since she came to power on Sept. 6, first leading national mourning for Queen Elizabeth before releasing an economic package that immediately roiled financial markets.Seeking to snap Britain out of more than 10 years of economic stagnation, Truss and her finance minister Kwasi Kwarteng set out 45 billion pounds of unfunded tax cuts on Sept. 23 alongside promises to deregulate the economy to stoke growth. On Monday they bowed to pressure to scrap the most divisive policy – eliminating the top rate of income tax for the highest earners – and are now working urgently on the full details of the plan and how they will be able to afford it without leaving a huge black hole in the country’s public finances.”We have to look at these issues in the round. We have to be fiscally responsible,” Truss told BBC Radio when asked whether benefit payments would rise in line with record-high inflation to prevent the poorest in society from becoming poorer.Immediately lawmakers in Truss’s Conservative Party – some fresh from forcing top tax rate reversal – opposed any move to reduce the increases in benefits at a time when millions are struggling with higher costs of food and energy.Penny Mordaunt, who is in Truss’s cabinet of senior ministers, said benefits should rise in line with inflation. Damian Green, part of the Conservatives’ centrist faction, said he doubted any real-terms reduction would pass a parliamentary vote. “I think there will be many of my colleagues who think that when you’re reaching for spending cuts, benefit payments are not the way to do it,” Green told BBC Radio. Another lawmaker, Roger Gale, also signalled his opposition. Kwarteng has set Nov. 23 as the date for his next fiscal statement but the government is considering bringing that forward. POLITICAL TURBULENCETruss became Britain’s fourth leader in six years last month, promising to reignite the economy and bring some political stability after the chaotic leadership of Boris Johnson. Chosen by her party’s members, not the broader electorate, she was not the most popular candidate among the more than 350 Conservative members of parliament and her decision to stake out a tax cut plan and then concede defeat has left lawmakers and investors questioning her judgement and authority. At the annual Conservative Party conference in Birmingham, central England, some lawmakers and commentators have questioned whether she has a mandate to take Britain back to a 1980s-style Reagonomics policy without a national election. The Conservatives won the 2019 election with Johnson promising to increase spending on public services. “It is not a great thing to sell the public on one type of package and vision, and then completely flip it and appear not to care,” Rachel Wolf, the co-author of the Conservatives 2019 manifesto, said at the start of the conference. Investors have also taken fright at the new economic policy direction, hammering the value of British assets so hard that the Bank of England had to intervene last week with a package worth up to 65 billion pounds to shore up the bond market. Mohamed El-Erian, an adviser to financial services giant Allianz (ETR:ALVG), said the government needed to get its house in order. “We are not a developing country and we need to stop acting like a developing country,” he told Sky News. The BoE action has calmed markets, at least for now, while investors also took some comfort from the tax U-turn and the hoped-for move to bring forward the publishing date for the next fiscal plan from Nov. 23.But Boris Glass, senior economist at S&P Global (NYSE:SPGI) ratings agency, said Britain faced a difficult winter, and spending cuts could counter efforts to boost the economy.”Unless strong medium-term growth can fully fund the extra spending, medium-term fiscal tightening appears inevitable, which may weigh on future growth,” he said. ($1 = 0.8782 pounds) More

MADRID (Reuters) -A slowdown in Spain’s economy, caused partly by the fallout from Russia’s invasion of Ukraine, will force Spanish banks to increase provisions to cover potential losses, Bank of Spain Governor Pablo Hernandez de Cos said on Tuesday.De Cos said a complex macro-financial situation, marked by energy price hikes and tighter financing conditions, was already hurting households and companies, leading to a slowdown in economic activity “in the third quarter and a general downward revision of the growth outlook for the following quarters”.”The potential impact of the current uncertain environment on the banking sector requires extreme caution. Banks will have to increase their provisions to cover potential losses,” De Cos told a financial event in Madrid.On Monday, the Spanish government lowered its economic growth outlook for 2023 to 2.1% from 2.7% previously. Though higher interest rates are expected to boost banks’ financial margins in the short-term, financial supervisors have recently cautioned against risks to financial stability stemming from the war in Ukraine. De Cos said the net impact of the new economic situation for banks over a three-year horizon could be negative if energy prices remain high and bottlenecks in international trade persist, generating further rises in inflation and additional monetary policy tightening.Senior bankers at Caixabank and Sabadell said at the same event that banks indeed expected a boost from higher rates but that they were aware of other more unfavourable scenarios.Santander (BME:SAN)’s CEO Jose Antonio Alvarez said the level of provisions in European banks had been “very low compared to Spanish banks”, a claim echoed by other Spanish bankers. The Bank of Spain governor said he expected to see most of the negative effects of households and businesses struggling to meet their financial obligations over the next two years. Spanish households are among the most exposed to a rise in interest rates as around three quarters of their outstanding mortgage loans are tied to variable rates.Overall, however, non-performing loans at lenders are at their lowest level since late 2008. More